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What is ESR Compliance / What is ESR in The UAE

ESR (Economic Substance Regulations) refer to every Entity (“ Licensee”) that Carries Relevant Activities and derives Income from Relevant Activities in UAE and is required to perform an Economic Substance Test. And Required to file ESR Notification and ESR Report.

To whom it will applicable and Who exempted from the ESR

Applies:
All Entities Registered in the State, including a FreeZone and Financial Free Zone, carries on a Relevant Activity.
Not Applies:
(Sufficient Evidence must be submitted along with the notification form to claim any of the exemptions)

An Investment Fund
Tax Resident out the UAE
Wholly owned by UAE residents; this is not part of a multinational group and that carries on business in the UAE
A branch of a foreign entity the relevant income of which is subject to tax in the foreign jurisdiction
Any other licensee as determined pursuant to a decision of the Ministry of Finance.

What are the ESR Activities / ESR Relevant Activity

(a) Banking Business
(b) Insurance Business
(c) Investment fund Management
(d) Lease-Finance Business
(e) Headquarters Business
(f) Shipping Business
(g) Holding company Business
(h) Intellectual Property Business
(i) Distribution and Selling Center business.
(j) Distribution and Selling Center business:

What is the Distribution & Selling Center Business

Following business (a) Purchasing from foreign connected person (foreign connected person means an entity that is part of the same group as the licensee) component parts or materials for goods; or goods ready for sale, and reselling such component parts, material or goods or (b) Providing services to foreign connected persons. Which includes transporting and storing components parts, materials, and goods ready for sale, managing inventories, taking orders, and, providing consulting or other administrative services.

Objectives of ESR

To determine the requirements and set out the criteria that confirm that a Licensee that is carrying on an activity in the state has economic substance (To ensure that UAE entities report actual profits that match with the economic activity undertaken within the UAE).

who is the Regulative Authority for ESR

Regulatory Authority: for ESR purposes each Relevant Activities have different Authorities including (1) Center bank (2) Insurance Authority (3) Security and commodities authority (4) Ministry of Economy (5) Free zones authority (6) Financial Free Zone authority.

ESR Information Requirement

Type of Relevant activity conducted
Amount and type of relevant income earned
Operating activities incurred for relevant activity
Business location, plant, property used for relevant activity
Number of employees
Core income generating activities in respect of Relevant Activities
Financials statements.

Is ESR filing mandatory in the UAE

Yes, Applies all Entities Registered in the UAE State, Including FreeZone and Financial Free Zone and carries on a Relevant Activity.

Who is required to submit ESR

Applies all Entities Registered in UAE State, Including FreeZone and Financial Free Zone and carries on a Relevant Activity.

What is the deadline for ESR report / ESR Notification

ESR Notification / ESR Report filing through the Ministry of Finance Portal. ESR Notification within 6 months from the End of the financial year.

What is the reportable period for ESR

ESR Report within 12 months from the End of the Financial year.

How do I file an economic substance report

ESR Report filing through the Ministry of Finance Portal.

Due Dates for ESR Notification and ESR Report

ESR Notification within 6 months from the End of the financial year. ESR Report withing 12 months from the End of the Financial year.

What is an ESR audit in UAE?

ESR Audit to evaluate UAE entity meets substance test, which includes Entities Registered in UAE State, including a free zone and Financial Free Zone, and carries on a Relevant Activity. Whether they perform adequately the relevant Core income-generating activities in UAE.

What is ESR regulation in UAE

ESR stand for Economic Substance Report, UAE’s member of OECD Commitment and Assessment UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019 and Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020 and an updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020.

What is the penalty for Non-Filing of ESR Notification

AED. 20,000/- : Failure to submit A Notification

What is the penalty for ESR report

AED. 50,000/-: Failure to submit ES Report / Failure to meet EST for each Financial year/ Provide in accurate information.

What is the penalty for ESR in UAE

Penalty for ESR Notification / ESR Report not submitted on time

AED. 20,000/- : Failure to submit A Notification
AED. 50,000/-: Failure to submit ES Report / Failure to meet EST for each Financial year/ Provide in accurate information.
AED. 400,000/-: Same violation in the financial year immediately following the financial year in which the violation was committed

A Licensee may appeal a decision of the Federal Tax Authority on ESR Penalties.

What is the ESR penalty appeal?

A Licensee may appeal a decision of the Federal Tax Authority on ESR Penalties to reconsider the penalties.

What is the Economic Substance Test (EST)

Licensee who has relevant income in the Financial year must satisfy the following criteria to meet EST in relation to Relevant Activity carried on by it: (1) Conduct necessary Core Income Generating Activity (CIGR) (2) Direct & managed in State (3) Adequate full qualified staff, expenditure, physical assets in state, etc.,